Gold May Not Be Bitcoin, But Miners Can Still Make You Money

  • Precious metals new-year rally repeated several times in past
  • Gold price outlook muted for 2018, stock picking will be key

Bitcoin Is Like Gold 2.0, Says Tyler Winklevoss

Gold and silver prices haven’t had the best year when compared to industrial metals, and the outlook for next year looks muted at best. 

The metals may not see the same gains as "gold 2.0," a term used to describe bitcoin by one of its biggest advocates, Tyler Winklevoss, but industry analysts recommend investors take a look at the "seasonal trade" in gold and silver equities. Early in the year, those stocks tend to perform better, creating trading opportunities.

And for 2018, analysts are expecting gold and silver prices to repeat New Year’s rally trends, with positive returns most likely to come in the first quarter. In fact, the NYSE Arca Gold Miners Index (GDM) saw its best performance on average during the months of January and February, while September and October had the worst performance.

Bloomberg seasonality chart for gold miners ETF shows it pays off to trade precious metals stocks early in the year.

Source: Bloomberg

Goldman Sachs

  • The “January effect” is well known in the equity market for its strong seasonal patterns that are observed in many energy and agriculture commodities.
  • Bank’s analysis showed positive returns in first quarters in precious metals prices, particularly in platinum and palladium and some base metals.
  • The rally in precious metals likely due to strong jewelry demand coming from China during the Chinese New Year and a pick-up in auto production (ex-China) after the holiday-related December slump.
  • Goldman, however, sees a negative six percent return from precious metals in 2018, mainly due to lower gold price estimate and expects prices to reach $1,200 per ounce by mid-2018. Silver to follow gold lower over the next six-months. However, after that time period, the metal should rise, and even outperform gold as high global growth should finally translate into greater industrial use of silver.

Canadian Imperial Bank of Commerce

  • The bank recommends playing "the seasonal trade" by buying gold or silver stocks in December and selling in February. The strategy has high probability of success, based on historical trend, but also comes with risks that could stem from changes to the U.S. Fed’s outlook in economy, stronger U.S. dollars and geopolitical uncertainty.
  • CIBC recommends that a gold-weighted portfolio’s core holding should include Agnico-Eagle Mines Ltd., Franco-Nevada Corp., Kinross Gold Corp. and Newmont Mining Corp. among large-cap miners. B2Gold Corp., Detour Gold Corp. and SSR Mining Inc. among mid-tiers, while Pretium Resources Inc. and Continental Gold Inc. are preferred among smaller-cap mining stocks. Also recommends Pan American Silver Corp. and Wheaton Precious Metals Corp. for silver exposure.
  • Investors who seek to add some "torque" to their gold/silver exposure can consider adding more leveraged stocks such as Barrick Gold Corp., Gold Fields Ltd., Goldcorp Inc., Kinross Gold Corp., Yamana Gold Inc., Detour Gold Corp., Iamgold Corp. and Coeur Mining Inc.

Toronto-Dominion Bank

  • The bank is expecting a repeat of New Year’s rally, which has materialized in the past four years. This rally mostly starts in late December and lasts well into the new year, with the GDX exchange-traded fund, which captures large-cap gold miners, up at least 34% each year.
  • The recent decline in gold miners’ share prices, where selloffs have been enhanced by tax-loss selling for some stocks, potentially sets the group up for another rally in January, next year
  • TD’s top picks for 2018 are, Kinross Gold Corp., Goldcorp Inc., B2Gold Corp., Alamos Gold Inc. and Semafo Inc.

Bank of America Merrill Lynch

  • The bank sees only limited room for rise in gold prices next year due to challenging macro-economic outlook for bullion.
  • The gold price is correlated with the U.S. dollar and volatility is one of the key variables that will influence the prices in 2018. However, the bank notes that a surprise on inflation data could bring buyers back into the gold market because as the metal is frequently held as an inflation hedge.
  • Estimates gold price of $1,326 per ounce in 2018, silver at $17.41 per ounce, platinum priced at $950 per ounce and palladium at $850 per ounce.

Morgan Stanley

  • The bank has a bullish stance on the outlook of palladium for 2018, due to robust demand growth driven by "diesel’s demise." Expects weaker U.S. Dollar to help gold price slightly, but will still be weighed-down by U.S. Fed’s rate hike cycle through the next year. Expects gold price to average $1,269 per ounce in 2018.
  • On the equity side, the bank notes that the ratio of bull versus bear for Barrick Gold Corp. is 2-to-1, while for Newmont Mining Corp., it’s 1.3-to-1. Both stocks are rated equal-weight.

Scotiabank

  • Next year should bring an uptick in deals within the sector due to lack of growth for the producers. Expects the larger-cap miners to pursue small deals with exploration companies with focus on early-stage development, whereas any corporate mergers would likely happen in the mid- or small-cap sector.
  • Most of the gold miners’ valuations seem cheap versus gold price, however, valuations for streaming/royalty companies are generally quite high. Agnico Eagle Mines Ltd. and Goldcorp Inc. are 2018 top picks. Also highlights B2Gold Corporation, Endeavour Mining and Wheaton Precious Metals among 2018 ideas within the precious metals sector.
  • The bank’s gold price forecast is $1,300 per ounce and $18.50 per ounce for silver in 2018

Royal Bank of Canada

  • Next year should bring some "measured improvements" for gold prices and the rise in prices likely to start with the seasonal trend of rally in precious metals early in the first quarter
  • The bank sees next year’s macro-economic backdrop to be less negative for gold prices than experience this year. However, a number of challenges likely to remain for prices in 2018, due to potential continuation of economic growth across most of the major regions in the world, rally in equities market and the U.S. Fed rate hikes
  • RBC forecasts the average gold price in 2018 to be $1,303 per ounces

Bank of Montreal

  • The bank expects mid-cap or intermediate producers’ share price to do better than larger-cap gold miners in 2018 due to better production growth and cost.
  • However, rather than taking the "shotgun approach" for choosing equities, the bank recommends investors take a more selective approach
  • BMO’s preferred equities are B2Gold Corp., Centamin Plc., Detour Gold Corp., Endeavour Mining Corp., Kirkland Lake Gold Ltd. and Semafo Inc.

UBS

  • Discussions around the debt ceiling and seasonal demand out of China in early first quarter should be supportive for gold
  • A gold recovery should also bring the platinum prices higher and trigger further short-covering. Although negative sentiment on diesel continues to weigh on the prices, there’s room for weak sentiment to moderate. For palladium, due to the recent strong price rally and relatively elevated positioning, the bank is cautious about chasing the metal price higher for now
  • Higher gold price will be supportive for silver, but relative performance likely to remain challenged for now. The metal needs volatility to pick up in order to revive investor interest.
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